Thursday, July 07, 2011

India Real Estate Market About to Crash Or Consolidation?

It is not easy to find an analyst on the street who will be mildly bullish on the real estate market leave along someone who is irrationally bullish. In a scenario where the market seems to be short the real estate market, the laws of contrarian investing state that “when the whole market is long/short a trade, the trade may not fructify” which is what is happening to the real estate market in India. Fundamentally, the market is poised on a knife edge with multiple triggers slowing the market down. Some of the macro pointing to an imminent fall in real estate market are:

75 bps Rate hike by India central bank in 2011 has had debilitating effect on families who have been thinking of a new house purchase. Rising borrowing costs and inflation are reducing ability of Indian families to purchase a house.

With more interest rate hikes from RBI in the offing, macro environment is expected to continue to get tougher. Therefore, the risk of an accelerated downturn in sales still remains.

Lower Loan/Equity ratio: RBI has now instructed banks to accept nearly 20% of house value as equity portion from the buyer thus effectively reducing the ability Indian families leverage to buy a home.

Developers borrowing cost: Rising borrowing cost have also effected developers who now find it difficult to complete projects.

150 comments:

Niranjan Hiranandani, founder and MD of Hiranandani Constructions, said the industry is bracing for a slowdown, especially in the upper-end of the property market where prices have gone through the roof. “I think there could be a 20-25 per cent fall in next few months, with the high-end of the market taking a hit,” says Hiranandani.

“In the last couple of months, sales of high-end properties have reduced to low single digit in a month which is a clear indication of slowdown,” said Mitra adding that the sales have dropped for affordable segment by 20-30 per cent.

Rates in the metros have shot up by 30-35 per cent in last one year. Sales of high-end luxury properties have slackened over last couple of months. The banks have increased rates by around 2-7 per cent during last one year. Due to alleged involvement of real estate players in 2G spectrum fraud and bribe-for loan scam, banks are cautious to lend funds to developers. Most players are facing cash crunch and are running out of options to raise fresh funds.

“Slashing prices and attracting customers is the only way for many builders. It is absolutely essential for them to keep up cash flow,” says an industry official.

"If you look at the bubble, the prices of property have gone up 1,000 times in the last 30 years. What is the rationale for this kind of price increase? What we need to do here is the biggest land holder in the country, the government, needs to release more land. The moment you have more land, supply sides constraints will go away and prices will come down," said Professor Amit Kapoor at the Management Development Institute.

It's a double whammy for realtors.

Most of the public sector banks have stopped cash flow to the sector completely.

"Real estate sector has been looked over very suspiciously over a period of time due to various reasons - lack of transparency, not enough listed companies. The whole sector needs revamping, only then private equity and bank funding will come on a large scale," said Ramesh Subramaniam, president of Sri City Developers.

Now real estate is being seen as a risky asset class.

The real estate sector is trapped in a circle that would not end, unless the developers either bring down prices or start constructing cheaper homes. But either way, the buyer is set to gain.

The Reserve Bank of India (RBI) has asked banks to go slow on lending to the commercial real estate sector. The regulator fears an asset price bubble.

The RBI advisory comes in the backdrop of a sharp increase in lending to commercial real estate projects in the last one year and non-performing asset (NPA) growth in the sector staying higher than the growth in overall loan delinquencies.

“Of late, most developers are not going for outright sales. They are leasing properties due to valuation issues. Banks are always more comfortable with outright sales. This is a trend that we have noticed. It has been communicated to the regulator,” said a senior official of a public sector bank.

At present, there is no cap on banks’ exposure to real estate, but RBI insists that banks should get internal limits approved by their boards.

Bankers said they were now cautious and had become selective in giving loans for commercial real estate projects.

RBI has noted that the growth of NPAs in residential mortgages and commercial real estate is 19.8 per cent, higher than the overall NPA growth of 14.8 per cent, in 2010-11. NPA growth in the commercial real estate segment was a staggering 70.3 per cent, with public sector banks suffering most of the losses. Rising interest rates will also put the asset quality of banks that are aggressive in extending real estate loans under pressure, say bankers.

Guys, Prices will further go up in Mumbai during/post Diwali. Good deals are in the offering by some reputed builders across Mumbai. Time to go with cash and negotiate hard. Please don't miss this opportunity.

I don't see any further correction happening here onwards on a medium term basis.

Builders across the city are offering holiday packages, lower rates, and on the spot discounts to attract buyers as the real estate market is heading southwards.

Prakah Rohera of Kkarma group says, "A builder in Khar was selling flats at Rs 22,500 per sqft. I called him and offered Rs 19,000 to which he readily agreed and promised to negotiate."

Not just in Mumbai, builders in Navi Mumbai are facing the same problem.

Manohar Shroff, secretary MCHI Navi Mumbai said, "The plot prices in Ulve once had gone up to Rs 65,000-70,000 per sqm, but now rates have come down to Rs 45,000. Land owners have realised that they have no other option but to lower the price to attract buyers."

Guys, Prices will further go up in Mumbai during/post Diwali. Good deals are in the offering by some reputed builders across Mumbai. Time to go with cash and negotiate hard. Please don't miss this opportunity.

==> What kind of drug is Mumbai on? They have defied all fundamentals and logic possible.

Where is this kind of money flowing in from? it was 10 lakhs, then lakhs, then 80 lakhs, now 1.2 crores... what is next if this opportunity is missed - 1.5 crores and 2+ crores?

I will wait for downturn... that is inevitable.

Also, check all the houses 1 crores houses have rent yield of INR 15k before taxes. I hope these houses become 2 crores and rent remain at 15k, also wish at same time the interest rates are hiked by 1% (deposit will increase by 4%)... that will be something interesting.

@said, @poltAt least in Gurgaon, prices are still going up in projects where sales are happening. Recently my friend bought in a project for 1 Crore. 4-6 weeks later, today the same thing is quoting at 1.10-1.15.

@said, @polt At least in Gurgaon, prices are still going up in projects where sales are happening. Recently my friend bought in a project for 1 Crore. 4-6 weeks later, today the same thing is quoting at 1.10-1.15.

==> Your friend is there to make money and not stay. I'm sure he or another sucker will go from 1.15 to 1.25 in no time. When are we reaching 2 crores... may be after Diwali - correct? Good!

Looks like this time it will be a permanent fall for RE prices for at least a decade. All the things have already been tried by powerful people like low rates, excessive liquidity and money printing, foreign investments, tax breaks etc.

Buyers are not buying now and this will create huge unsold inventory. Once the prices reduce even by 5-10%, half of the speculators/investors will dump their RE also in the market to make hay while it shines. This will increase inventory further and more price declines.

The above will lead to a lot of NPAs and all these NPAs may easily suck one or two banks. This story will continue for 3-4 years till the prices eventually drip by 60% or so. In this process around 20-25% jobs will be lost and wages will be subtracted from high paying salaries.

In the end it will take nearly 10 years for this whole thing to correct. I'll be nearing my retirement by then and I would have no need of a house then. maybe I'll get a retirement home in USA now at throwaway prices rather than waiting for 10 years here in India.

@Pawan,My contention is that all reasonable valuation parameters say a bubble is present. But real estate cycles may take years or decades to reverse. May be our bubble has some more steam left in it. Who can say?

If you are interested in financial history (a hobby of mine), check out the Herengracht index for Amsterdam. 350 years of home prices tracked through various phases of Dutch history. The Dutch like the British were very meticulous with their record keeping. The index showed that an entire generation could grow up thinking prices never fall and then another generation would encounter falling prices throughout. In real terms, prices merely doubled over 350 years !!!http://hotelivory.wordpress.com/2010/08/29/a-very-long-view-on-house-prices/

My contention is that all reasonable valuation parameters say a bubble is present. But real estate cycles may take years or decades to reverse. May be our bubble has some more steam left in it. Who can say?

==> Correct! Also, history book states that faster, bigger and no-fundamental bubbles ALWAYS get deflated faster, bigger and to the fundamentals.

Therefore I really wish the builders and sellers should jack up price 100% overnight... or at faster pace then people's earnings potential.

There can be only two things that can happen:

1. People stop buying RE and it will correct to the level of affordability to majority.

2. Increase in purchasing power by people charging more for their labor and products... so everything around you will get freaking expensive to uphold purchasing power.

Noticed your paycheck? EMI? your servants and drivers charging for their services? it is just the beginning... Up is the word.

I’m sorry to throw cold water on the party here, but societies with massive corruption and underworld crime typically have very high housing prices. There’s really nothing that can be done about it. You can’t expect a crash in such markets. Look at the facts.

Guess what all these cities have in common? Massive corruption at all levels, a privileged ruling class that uses state coffers as their own piggy bank, a state-enabled thugocracy and a large criminal underclass swimming in black money.

NONE of these places have had any significant correction in real estate prices since the crisis began. Yep, the so called economic crisis of 2008, the Great Recession, the Greater Depression, whatever you want to call it, has not put a DENT, no, not even a teeny-weeny dent on real estate prices whatsoever. In fact, real estate prices have gone UP following one of the greatest deflationary periods in human history!

What are the chances that real estate prices are going to go down NOW meaningfully in these places? I’m sorry to say this, but the chances are well near ZERO.

Real estate prices may revert to mean following bubbles in countries with honest governments, equitable law enforcement and a civilized populace like the UK, US or Spain, but certainly not in India.

Yeah, it really is different this time... only not in the way you think.

“The Dutch like the British were very meticulous with their record keeping. The index showed that an entire generation could grow up thinking prices never fall and then another generation would encounter falling prices throughout. In real terms, prices merely doubled over 350 years !!!http://hotelivory.wordpress.com/2010/08/29/a-very-long-view-on-house-prices/”

It is criminally irresponsible to compare Holland to India. First Holland has a strong currency, the Euro (and before that the stable Gilder) not the Indian Rupee which is not worth the paper it is printed on.

Ekcept for last anonymous bhayya, all others have written bulsit. i agree that prices have reached peak. They may not rise further. There will be a drop after monsoon season. But how much ? A 20% drop ??? Can common man afford if price from 1 cr becomes 80 lakhwa. ?

Filat prices have risen porportianally with income. Teacher who was getting 5000 is now getting 40000. Filat costing 20lakhwa now priced at 160 lakhwa.

Nothing has changed. Only rich have become richer and educated people moving up. But those who dont get riswat, cant but filat. They can only blog on internet cursing others. Also some bhayyas always compare our bharatmata with videsi contry and this is wrong because videsi economy is not as aorrupt as ours.

Santander is moving all its call centers from India back to UK. They say salaries are high in India now and rents have also creeped up a lot. Looks like this will be the fate of many of the outsourcing co.

@Anon"It is criminally irresponsible to compare Holland to India. First Holland has a strong currency, the Euro (and before that the stable Gilder) not the Indian Rupee which is not worth the paper it is printed on. "

Not really. Over 350 years, it went from being a poor country to being a rich stable and developed one. Much like what we hopefully will. It went through wars, bubbles, currency crises, etc. We will too. And with large parts being under sea-level it has far greater land constraints than we do. So how come prices did not keep up with population and income .

The point I was trying to make was that over the long term real estate gives poor real returns. Lots of data points available. See the Case-schiller index, or the economist article that I posted earlier. You can see data for over 20 countries

“The point I was trying to make was that over the long term real estate gives poor real returns. Lots of data points available.”

I don’t disagree with this, but you will never see the poor real returns if you measure it in Rupees. Indian real estate will crash when measured in Euros, Yen or Swiss Francs. But it’s not gonna budge when measured in Rupees. Our Central Bankers will make sure of that.

As I pointed out in an earlier post, the Rupee is a currency that has depreciated nearly 100 times over the past 30 years in terms of purchasing power.

Look who's talking about RE correction !!!! What happened all the black money and corruption??

==> Black money and corruption is back bone of Indian economy. As long as they are in play India will grow hypothetically. RE prices will also rise... I still say I wish they go from 1 crore to multi crores prices.

"Indian real estate will crash when measured in Euros, Yen or Swiss Francs. But it’s not gonna budge when measured in Rupees. Our Central Bankers will make sure of that."

Your point that RBI will monetize the debt is well taken. Inflation has been the tried and tested method by banks across the world.

Two points I disagree with. One is that you will see gains in rupee terms. Lot of countries had double digit inflation in the 70s. For example, the US had high single or low double digit inflation (stagflation) through much of the 70s till interest rates were jacked up to 14% in the 1980s. Even then RE prices there in dollar terms were flat. I suspect it will be similar story here in rupee terms.

I am not saying RE is bad investment for everyone. If you are risk averse and happy with preserving wealth, then yes it is a good avenue. But if you are willing to take a few risks and want to improve the standard of your living through prudent investments, then historically equities will do that for you. No guarantees though.

I see a lot of comments about how black money will never allow RE to fall. I disagree, because a lot of that has already been pumped into RE. Money in RE is hard to track, and for large sums of cash it is probably the best place to park it (next to gold).

So if we see a fall, then that money is gone. To borrow a famous ad-line 'The only sound you will hear is that of investors running for the exits'. The money will vanish silently.

The root cause of housing problem in Mumbai is the unrestricted inflow of immigrants from Bihar/UP/MP. In short, people like Tabela Bhayyas. Now the Tabelas and the Bhayyas have outlived their utility, it is high time to encourage them to return to their home land where they can worship their deity Mayawati or indulge in their ancestral practices like dacoity, polyandry and population reproduction.

Once the Bhayyas are gone, Mumbai will have plenty of land to redevelop and this will lead to a significant drop in real estate prices. Business will boom, there will be plenty of greenery, no beggars and slums . I am sure that the city will be in par with Singapore in a decades time

yeah same for marathis..they are an uneducated breed with their tapori language.they must be thrown in some remote maharastra village where they might feel at homelike any civilized society only allow migrants and educated people.

I am from south india living in Mumbai. Though I am a migrant, I totally agree with Marathi Manoos regarding north indians. This phenomenon of Bhayya migration is not limited to Mumbai. The Bhayyas are settling down in places like bangalore, hyderabad and mangalore where no one speaks or understands Hindi. Where ever they go, they create slums. Once they learn the local language, they start bringing women from north for prostitution, form gangs, steal etc

The government should introduce some sort of permit system to check interstate migration. Uneducated people should not be allowed to migrate outside their state boundaries

“Two points I disagree with. One is that you will see gains in rupee terms.”

With respect, I never said that you would see gains in rupee terms. I simply said that there will be no meaningful (if any) decline in real estate terms when measured in Rupees.

Please look at my earlier post at 1:07 pm. None of the other countries/cities with similar thug-o-cracy profiles as India have housing markets that have crashed in nominal terms. Not one. Why do you feel India will be the first to crash? Based on what? Unaffordable real estate prices are first and foremost a reflection of massive income/wealth inequality in these societies. You feel that these inequalities will be ironed out shortly by a crash in the real estate market? Based on what exactly?

The problem with our times is that the little guy has now gained a sense of entitlement. He looks at his ever-increasing paycheck. Pats himself on the back at all the Singapore/Malaysia vacations he’s suddenly able to afford. Looks with satisfaction at the dazzling range of electronic gadgetry he has accumulated. Then he fumes with anger when he can’t even afford a house in his home town given his increasing levels of apparent prosperity.

The fact of the matter is that Indian real estate has always been unaffordable for the little guy. As “Tabela” correctly pointed out above, it doesn’t matter whether your income is 5,000 per month and the flat costs 20 lakhs or whether your income is 40,000 and the flat now costs 1.60 Crore. Either way, that flat is out of your reach.

@" None of the other countries/cities with similar thug-o-cracy profiles as India have housing markets that have crashed in nominal terms. Not one. Why do you feel India will be the first to crash? Based on what? "

Firstly, democratic countries are generally far more stable. We are not perfect, but we certainly are not Colombia, Pakistan, Nigeria. Secondly, I would venture that these countries too enjoyed the some world-wide credit bubble over the last 10-15 years. They too will correct like the West has.

Historically, the thug-o-cracy systems are the most unstable and do not last long. The Middle east is providing a live example now.

I have never said "crash" anywhere in my posts. All I have said is that valuations are overextended. We could have a slow/steady correction as well. Maybe incomes will catch up eventually with prices. Who knows.

"Markets can stay irrational longer than one can stay solvent", but fundamentals will reassert themselves.

If you want power and influence, the renters should get together and form an association. This way then can ask for transperency in real estate transactions, releasing land for more buildings, take action against shady builders.How about Bombay Renters Association (B.R.A.) to protect the renters and their sagging mood.

I know a place that is priced at 1.3 crores that is currently on rent for 25k. Rent yield per annum = 2.31%

People in India are not mobile for their work, many don't want to relocate as cities like Mumbai provides everything. I have not yet met anyone who came from outside Mumbai and didn't love Mumbai. They say considered whole India - Mumbai is safest, fun place. It provides work for everyone from non-skilled to skilled labor.

Well, where do so many people get crores to spend on RE and then also buy gold, diamonds, expensive cars, invest in stocks, electronic gadgets, traveling international for vacation, weekends on resorts and at the end again buy RE worth crores IS BEYOND ME.

Hello,According to my opinion,Property Investment is best option. Real Estate is simple. If prices have fallen in the last 5years, buy and plan to hold for minimum 10 years. Anyway, Thanks for sharing post about real estate.

Currently Mumbai population is estimated to be 23 million. (Official figure 21m and the rest 2m roadside dwellers who constantly on the move). In 2025 , the city is expected to cater for 35m as per our central statistical bureau. To cater for these 12 m, 2 million homes will be required to be built (household size 6), be them be palaces, flats, slums or tents. Going by this simple rationale, the real estate crash or drop, is just a dream. It is not going to happen

Govt may rebuild Dharavi, but 100s of Dharavi like slums will blossom in the suburbs. Mumbai is a slum city and will remain so. The state is ruled by uncultured ghatis and these ghatis will never improve. If you happen to go near MLA hostel in colaba in the early hours , you will find many MLAs taking a shit in the hostel vicinity along with mahatma phule slum dwellers.

Good points but some of your observations are outdated. Now there is heavy security around the MLA hostel and the western style toilets attached to suites are converted to Indian style so that the MLAs don’t go to the lawn and shit/urinate. No badwagiri either as all visitors requires special passes to enter.

The statistical bureau bases its forecasts on known trends. However, I feel that people will start moving out of this city due to disease epidemics, cost of living, law and order situation and this in fact may start shedding the population and the growth might turn out to be negative. We never know.

As for real estate, I am very sceptical about the crash. For all I know, that there are hidden millionaires living in chawls and zopdas, and their numbers will be sufficient to swallow the over priced properties

Equities are trading around 18 times earnings and if you take forward earnings then ratios are around 16 I think. Quite reasonably priced.

Basically equities measure consumption of all the mundane daily things that we use (FMCG goods, medical services, insurance, banking, travel, pharma, electronics, etc etc). And these are being valued at 16, but homes are being valued at 35-40!!

I would have thought that people would consume the regular stuff before they actually go out and spend on a house. But the P/E ratios earnings indicate otherwise. They seem to show that the markets expect consumption of homes to grow much faster than consumption of goods! (i.e. for the sake of calling a home their own, folks are willing to cut down on regular probably more important stuff).

They seem to show that the markets expect consumption of homes to grow much faster than consumption of goods! (i.e. for the sake of calling a home their own, folks are willing to cut down on regular probably more important stuff).

@PoltI would have thought that people would consume the regular stuff before they actually go out and spend on a house. But the P/E ratios earnings indicate otherwise.

Get your comparison right. Marico is trading at PE 48, HUL 35 and GILLETTE at 68. There is no FMCG index or you would have seen that the average PE is actually 40+ for this group.

For the sake of calling a home their own, folks are willing to cut down on regular probably more important stuff.I don't think so. I know people who cut down on eating out, going to malls/movies but then are these important things? I have seen people delaying kids till they own a home but then what is wrong with that either?

@Pawan, I was talking about overall Sensex. You cannot pick and choose high P/E companies.

The sensex measures more than just discretionary expenses like movies :). Consumption like medical care, banking, insurance, processed foods, education, are also counted.

Besides another reason I think is that like the Anglo-saxon countries we too seem to have some stigma attached to renting a house.People feel better owning one (even if ownership will come after 10-15 years of loan payments).

The French, Germans, Dutch seem to have no problems with living in rented homes. And they have not had bubbles of the same magnitude as US/UK/Ireland/Australia.

@PoltI have not chosen random companies - they are the biggest FMCG names. They sell products you use on a daily basis. Add Nestle, PE 47 and ITC, PE 31 to that list. All FMCG companies are richly valued today.

Secondly, are rental returns so low all over the country? Then why compare the returns of prominent/posh areas to a widely distributed index like Sensex? (Sensex's skewed composition is another story though).

Your argument that Sensex is cheap compared to companies selling things of daily use is not correct. However, if your argument is that one should invest in Sensex rather that RE then that makes perfect sense as Sensex is trading at half the valuation of property.

But then read the previous sentence again. If you are 'investing' in property then only you will compare valuations. Most people who are willing to buy want to live in their homes. They will buy for social prestige, psychological relief and sense of security.

I am currently re-reading the excellent book by Schiller - Irrational Exuberance and since he talks of real (inflation adjusted) returns only, here is what you have with Sensex.

Sensex was at 21000 in Jan 2008. Five years later, in Jan 2013, if Sensex reaches 30,000 then the gain for the 5 year period will be 8% YOY which is same as inflation. So after the huge returns from 2002 to 2007, Sensex would have given zero real (inflation adjusted) returns in the next half-a-decade.

This is called reversion-to-mean. It comes for every asset class. RE will get there too sooner or later.

@Pawan - If FMCG index is around 30, then probably wise to stay away from it.

I was talking about rental yields in Bombay. Bangalore is somewhat better off. Around 30. (This is of course anecdotal evidence based on talking to colleagues and friends and relatives).

"Most people who are willing to buy want to live in their homes. They will buy for social prestige, psychological relief and sense of security."Thats what the yanks, brits and irish, spanish, ... thought as well. They too thought that real estate will always go up like so many here seem to do. Look what its brought them. Misery for millions.

BTW, schillers book is fantastic. Should be required reading for all :)If you do not mind some data heavy stuff, read 'This time is different'.

“So what is fueling these affordability for many and for few like me it doesn't? May be I need to get into their profession... which is???”

Not profession, location. Almost every Indian family these days has a son or daughter in the US, UK, Gulf or Australia. Just go and see the lines outside the US Embassies in Chennai or Bombay every day. The approval rate for visas is currently above 60%. 60% of those people are heading to the US every DAY, and that’s just one country. Do the math for all applicants in the embassies for 50 desirable countries in the four metros EVERY DAY.

If you’re earning strictly in Indian Rupees, you’re competing with an entire nation of families who have family members earning in Dollars, Pounds and Euros. Indians are *extremely* frugal when they go abroad and are able to save massive amounts of money when they are there. These savings are translated into gynormous down-payments on (what else?) housing when they come back to India.

Bottom line “Said”, you don’t stand a chance. The game is rigged against you. Your only chance is to not play (i.e. rent) or go abroad as well and earn wages in an adult currency (as opposed to INR monopoly money).

If you’re earning strictly in Indian Rupees, you’re competing with an entire nation of families who have family members earning in Dollars, Pounds and Euros.

Bottom line “Said”, you don’t stand a chance. The game is rigged against you. Your only chance is to not play (i.e. rent) or go abroad as well and earn wages in an adult currency (as opposed to INR monopoly money).

And what will happen if the Euro disintegrates or Dollar collapses, Aren't these the same ppl who come back to India and start earning in Rupees like one of us like what happened in 2008. What will happen to the RE that is targeted at these people???

Bottom line “Said”, you don’t stand a chance. The game is rigged against you. Your only chance is to not play (i.e. rent) or go abroad as well and earn wages in an adult currency (as opposed to INR monopoly money).

==> Thought so, am already working my way towards earning in dollars. Good thing is that one can work for MNC in India and get great income - not because of Indian economy, but because of currency conversion jobs... like offshored IT.

@Shailesh On Rent Vs Home Price equation. One of my friend rents 2 bhk in mumbai for Rs 14,000. The owner is asking almost 1 cr for it. The yield is then just 1.6% per year. Just crazy to buy into this market.

I am somehow not too comforted by this yield thing but I can't put my finger to it. At today's closing, the dividend yield of Nifty is 1.28%. So we should not buy Nifty then? After all FDs are giving you 9% today.

Nifty's PE at today's closing is 20.29 which translates to yield of 4.93 out of which only 1.28 is being distributed as dividends are rest is being retained by the businesses.

We still buy stocks hoping for capital appreciation rather than for dividend yield. Therefore, shouldn't capital appreciation be the yardstick for house prices instead of rental yields?

One thing FDs don't provide you and RE does is inflation protection. May be people are scared of inflation and that's why they are buying RE?

Cheap credit is also fueling housing growth. So is corruption, black money, govt. regulations etc. But has gold or stocks given more returns in the last 10 years than RE? Not really. In fact you don't get cheap loans and tax rebate to buy stocks and gold so that way the RE boom is less strong than these assets. Why then are we not arguing for a collapse of stock prices or gold prices or other commodities? Why RE only?

@anon above - "These savings are translated into gynormous down-payments on (what else?) housing "This may not be such a bad thing. It means mortgages here are not of the sub-prime kind and if a downturn in RE happens, it hopefully will not affect the banks and the economy.

@Shailesh - "The yield is then just 1.6% per year. Just crazy to buy into this market." That really takes the cake. We do not have a large REIT market, otherwise short selling would have been an option for some.

And what will happen if the Euro disintegrates or Dollar collapses, Aren't these the same ppl who come back to India and start earning in Rupees like one of us like what happened in 2008. What will happen to the RE that is targeted at these people???

==> What if? I assume, there are no if in Mumbai or India. In 2008 people were still getting good earnings, more jobs flowed to India. Where does this end as long as westerners are greedy and want to increase their individual profits. They will send jobs to lower cost countries as long as their profits are up - in good times and bad times.

"We still buy stocks hoping for capital appreciation rather than for dividend yield. Therefore, shouldn't capital appreciation be the yardstick for house prices instead of rental yields?"

There is a difference (I think). The dividends are paid after earnings are reinvested into the firm. With a house, beyond making cosmetic changes (wardrobe/tiles etc) you cannot really reinvest continually and expect exponential growth in its earnings (rent).

So capital growth in stocks is based on long term earnings growth at faster than inflation rate. Generally average earnings for the index grow at inflation + realGDP.

Whereas in a home, rents generally keep pace with inflation (the rent increases in the last few years are not really representative of long run patterns).

@Polt, the price of house/flat usually should be around 300 times the monthly rent. That way return will be around 4~5% which should be good considering inflation/appreciation. Anything less will be pure speculation on future trend and hence risky.

Great posts above Pawan and Polt. I personally fall on the Polt side of the equation whose latest post is one of the most articulate expressed on this board recently.

I just want to make one comment on Pawan’s comment that RE has outperformed Gold. This is clearly not the case as Gold has outperformed RE many times over the past decade. In fact, measured in Gold, Indian RE has collapsed.

Also, RE cannot be analyzed purely on a P/E basis because there is an “ownership premium” in India whereby people are willing to pay a premium for owning real estate due to the social prestige attached to owning as opposed to renting.

Secondly, another reason for the high P/E of real estate is that investors are betting that sufficient zoned land/infrastructure won’t come into production faster than the rate of population growth. In other words, RE investment is basically a leveraged bet that: (i) the population will continue to explode; and (ii) governments will continue to be grossly incompetent/corrupt.

Secondly, another reason for the high P/E of real estate is that investors are betting that sufficient zoned land/infrastructure won’t come into production faster than the rate of population growth. In other words, RE investment is basically a leveraged bet that: (i) the population will continue to explode; and (ii) governments will continue to be grossly incompetent/corrupt.

==> These conditions were true 8 years ago and also 20 years ago... so what exactly changed in past 8 years, especially in past 5 to 6 years --- everybody just woke up?

”==> These conditions were true 8 years ago and also 20 years ago... so what exactly changed in past 8 years, especially in past 5 to 6 years --- everybody just woke up?”

Massive money printing to keep up with Greenspan/Bernanke’s printing presses, insanely hyper escalation in the levels of corruption (I remember the days when a former PM was accused of stealing 1 Crore, today our current Babas steal that much before breakfast), exploding income levels, exponentially higher people traveling and working abroad, dramatic levels of increase of RE red tape and regulation, sky-high inflation, escalation in the price of gold (Indians own large quantities of gold, so as gold prices go up, they can buy more RE), stricter global money laundering regulations that make banks an unsafe place to store money (and make RE an attractive place to do so).

==> That's what I like to hear rather than all glorified stories of demand and supply and calculation of P/E ratios. Dig deeper, it all boils down to fractional banking. People who have access to these funds at right time at cheaper rate control. I say people who control flow of money have bigger power than people who have money.

Dig deeper, it all boils down to fractional banking. People who have access to these funds at right time at cheaper rate control. I say people who control flow of money have bigger power than people who have money.

Don't blame it on Fractional Banking, it was always there and there are many positive aspects of it. Since last 8 years the main thing that changed was a drastic reduction in interest rates and highly leveraged people were able to wipe out their debts with inflation. With interest rates creeping up again, lets see where this will end. Everybody is having a big bet that we are at the top of inflation cycle and low interest times are going to be back soon evident from FD rates 1yr vs 3 yr comparison. It seems like this bet is going to go wrong and we are going to see the results of it.

In 2008 people were still getting good earnings, more jobs flowed to India. Where does this end as long as westerners are greedy and want to increase their individual profits. They will send jobs to lower cost countries as long as their profits are up - in good times and bad times.

Don't go by historical stats. Look around. Yesterday, Infosys announced the results, the profit decreased QOQ and that is in these good times and when they are going to add 45k ppl to workforce this year. Imaging what can happen in bad economic situation, how many people can lose their jobs and which other industry can absorb them with the same pay?

The dividends are paid after earnings are reinvested into the firm.True. But an REIT would do the same thing.

However, you other argument that good stocks (and their underlying businesses) will grow at faster than inflation rate over very long periods while RE is only expected to keep pace with inflation is solid.

But we have already discussed in previous posts that when measured against gold, oil, rubber and other hard commodities, RE has not given any returns. Now its up to you to decide whether you consider gold to be the correct indicator of inflation of Indian govt. numbers.

Measured against Gold, RE is not in any bubble and this despite the fact that there are cheap loans available to buy RE along with tax benefits. However, relative to people's earnings growth, RE may be in a bubble.

What is your opinion guys? Are there not sufficient number of people/household in India earning 20+ Lacs per year to absorb the limited RE supply for a few years even at traditionally expensive valuations? Beyond that of course RE companies will have to cater to lower income groups.

@Pawan - "Are there not sufficient number of people/household in India earning 20+ Lacs per year to absorb the limited RE supply for a few years even at traditionally expensive valuations?"

There might be (probably are). But my contention is that this kind of behaviour of buying overpriced assets is textbook "Irrational Exuberance". Eventually sanity will prevail and people will ask whether fundamentals justify the price.

Yes, it could be that incomes continue to rise in double digits for a long time to come and prices (and ratios) become justifiable. I am a little skeptical though.

Also agree with other posters that RE could have an ownership premium and therefore somewhat higher P/E ratio. But certainly not double or triple the ratio of the stock markets.

@pawan - "Stock markets in the last decade are up like 6-7 times, Gold is up almost 7-8 times and RE is up 7-8 times too."

Ratios revert to mean and provide insight into valuations. Which is why we should work with ratios and not absolute increases. Yes, certainly Sensex earnings might fall and bring down the index further.

Stocks react faster to changes in earnings. Whereas real estate cycles can last a long time. So maybe we are just getting started and home owners will continue to become wealthy for a few more years !

Gold for 600 years has kept pace with inflation. Even today it is below its 1980 peak in real terms. Will this time really be different?

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

-FOA

In the above quote just replace every reference to dollar with rupees and then you get the picture.

@Tabela Bhayya and his compatriots,The people from UP and Bihar are like Virus for India. They are spread all over India and affecting badly to all the people there. They need to be quarantine back to UP and Bihar states.

@Tabela Bhayya and his compatriots,The people from UP and Bihar are like Virus for India. They are spread all over India and affecting badly to all the people there. They need to be quarantine back to UP and Bihar states.

==> You talk ignorant. For any economy to flourish it need consumers, more the merrier. More consumer means more demand, means more money flow in economy. It means growth. Also this will bring down labor costs.

Have you ever thought what would happen if there were no poor migrants from other states to Mumbai? are you sure you would enjoy all cheap servants from electric board to autorickshaw drivers to watchmens.

That is one most important reason you will see slums even in the most poshest location in Mumbai. Remove slums and stop migrants and you will feel deep pain of cheap labor.

Bangalore: New Delhi stood out as the most expensive Indian city according to a survey done by human resources consultancy Mercer, New Delhi is India's most expensive city for expatriates, followed by Mumbai and Bangalore.

While Delhi is ranked 85th, Mumbai comes in at 95 and Bangalore at 180 Chennai, Kolkata ranked 195th and 207th on the global list respectively, according to the study, which rates Tokyo as the most expensive city in Asia for expatriates. Singapore passed Hong Kong to become the costliest place in the region outside of Japan. Tokyo retained its status as the second most expensive city in the world for expatriates after Luanda in Angola, which topped the list for the second year in a row.New Delhi most expensive Indian city for expats: Survey

are you sure you would enjoy all cheap servants from electric board to autorickshaw drivers to watchmens.

Life quality is also important for them. Every state must do progress and create employment for the people living there. Imagine if all people come to places like Mumbai, Banglore, Hydrabaad and other cities what will be the situation of these cities.what kind of quality life we can see there ?

(It's not hatred against UP and Bihari people but truly they have made the things worst by means of infrastructure)One shopkeeper who was "Bhaiyaa" selling pani-puri caught last month. He use to pee in the vessel and was using that water to make pani-puri. Do I need to say any more ?

“However, there’s a huge gap between the monthly EMI amount and rent. The better option right now is to wait for a correction in property prices,” he added.

Pankaj Kapoor, the chief executive of Liases and Foras, a real estate research firm, said it is very logical and practical to stay in rented houses. In Kharghar, in Sector 35, a 2BHK flat costs Rs60 lakh.

“For this house, the buyer has to pay Rs60,000 as EMI. But the same buyer can get the same house on rent for Rs6,000. As a result, people prefer rented houses at present,” he said.

Kapoor continues, “If someone does buy a house, there will be no appreciation in cost in future because developers have hiked property rates keeping the next 3 to 5 years in mind. So buyers will get only a marginal capital benefit. Most flats bought for investment purposes are lying empty, hence rent costs are low,” Kapoor added.

Since 2009, developers had increased property rates by almost 40%. Many home buyers are now playing the waiting game, anticipating a correction in the market.

Plus, home loans aren’t easily available. “Interest rates have gone up drastically. Till a year ago, buyers were getting a home loan at an interest rate of 8% from any nationalised bank. Now, the interest has gone up to almost 10-11%, which may go up further following the increase in key policy rates by RBI,” said a real estate expert.

By ordering the builders to pay back with interest the money the aspiring home owners had deposited for their housing schemes in Greater Noida’s illegally acquired land, the Supreme Court has shown that justice is not blind but is tempered with mercy. The builders, who had plotted the land in collusion with state officials to make a quick buck, cannot be allowed to take advantage of the situation. The court had found that the Greater Noida Authority had rushed to acquire land without giving notice to farmers and then handed it over to real estate developers even before the land use plans were changed. Now that the Supreme Court has upheld the Allahabad High Court’s decision quashing the land acquisition, neither the state authorities nor the unscrupulous builders deserve any sympathy.

We may or may not have a bubble, but it is nothing compared to this. Ghost cities in China.http://www.youtube.com/watch?v=rPILhiTJv7E

In many other places in China, people have bought homes and actually refuse to rent them out because they think that they house value goes down. The house is kept empty simply in the hope of price appreciation.

If i had a 5 crores now y wud i buy a flat in worli.. when i know it makes no sense at this moment. i wud rather invest it elsewhere where i can get good returns.. right?

That is why prices have to come down. Logic prevails in such situation.

==> Wrong. Do you really think Indians are that dumb? If you had 5 crores (which you might) then you would buy RE worth 2 crores and rest invest somewhere else. Else why would you see people spending money on jewelery and expensive electronic gadgets. Don't for get international weekend vacation to Malaysia, African Safaris.

Bubbles are created to make money. Correction / crash will also come into play when these bubble makers are ready to short the game, where they again make money.

i have been waiting for the last 5 years to buy a flat... and prices have gone up 30-40 % every year..a flat that was 40 lakhs in 2006-7 in andheri ... is now being quoted for 1.8 non negotiable.. 2 bedroom flat in a 20 yr old building... thats half a million dollars... ! and still deals have taken place int eh same building for 1.6 just recently.. i really dont know what to think.. at 80-90 lakhs when it was in 2008 and the financial crisis started i thot its gonna fall now hopefully back to 60-70 .. but it has literally doubled in the last 3 years... leavin me pretty incredulous.. most of my stocks are at 52 week lows.. the midcaps.. and the property which i didnt buy is at life time highs :(

even rents have gone up .. the same andheri apt was renting for 14 thousand back then is 38k now !

“==> You talk ignorant. For any economy to flourish it need consumers, more the merrier. More consumer means more demand, means more money flow in economy. It means growth. Also this will bring down labor costs.”

With respect, this is unmitigated rubbish. Sweden, Switzerland, Norway, Singapore all have very small populations, yet their economies are “flourishing”. India, Bangladesh, Pakistan by way of contrast have very large populations and they are definitely less “merry”.

What is needed for an economy to “flourish” is not more warm bodies, it is higher rates of productivity. Sweden and Switzerland are prosperous because their productivity rates are much higher than India. The quality of life also is much higher there even though they don’t have hordes squatting by the tracks to do their business or vendors who will serve you urine-laced Pani Puri on the streets.

Mumbai is hijacked by UP and Bihari's cheap people. All slums are developed because of these UP and Bihari's. They should be kicked out of Mumbai and Maharashtra. Go back to your states and develop them and live their.

Mumbai is hijacked by UP and Bihari's cheap people. All slums are developed because of these UP and Bihari's.They should be kicked out of Mumbai and Maharashtra. Go back to your states and develop them and live their.

==> And what will that achieve exactly? Lower RE prices? lower black money? lower corruption? cheap labor? don't start with cleanliness... haven't you seen gujjus and marathis spitting everywhere. What have all native Mumbaities have done... clean your toilets and roads? Are all corrupt politicians in Mumbai are from UP? Is a pandu taking bribe while scratching his balls is from UP?

QE3 Baby...means higher inflation again being exported to India. Means more rupees being printed to keep up with Helicopter Ben, onions up, dal/chawal up, riots on street.

But wait, you cant print forever, so once this madness end, i.e as soon as the "DONKEY" OBAMA & his MAMA leaves office and the ELEPHANTS take over the White House we either see huge cuts or bloody war. U can pick the countries, the missiles are already aimed in that direction. SO people Hell is going to break loose, today or tomorrow. Dont be suckered into another RE deal, cash out, convert your money to FX gold etc and go to paradise, where ever that would be for you.

Is it deal to buy Gold at $1600 INR=24K? What about ETF ...any suggestions?

No one can answer that. What happens if QE3 does not come?

We discussed on this forum that Gold and RE are only stores of value - hedge against inflation and I would argue that RE is better because you can rent it out and get some money in return which is not that easy for Gold.

If I buy a house to live in and then it goes down in value, I will not feel that bad since I am living in it but what if I buy gold and it goes down? What do I do with it?

@said but you still are in Mumbai taking all the shit , if you are not from UP go to where ever the FCUK you are from and try to make a difference and keep making such statements one day you say something which actually makes sense until then keep trying

@said but you still are in Mumbai taking all the shit , if you are not from UP go to where ever the FCUK you are from and try to make a differencand keep making such statements one day you say something which actually makes sense until then keep trying

==> There you go with personal attacks and racism.

Your post clearly exposes your situation - you got royally fucked by some UP guy and didn't enjoy... may be you should get fucked again... try and try till you get happy. ;-)

It is only and only corruption money which is sustaining that is keeping the real estate prices up. If a politician or bureaucrat is making crores he is not going to buys dozens of cars, he will make investment in property because in India the property is never registered at the market price, it is just at 20-30% of the market value. Thus only the property can absorb black money. But the common man has to pay the real price, as once the standard price is set, he has also to pay the same price as to be paid by corrupt people.It becomes a vicious circle.

Three hours after a bomb turned a bus stop in Dadar, in central Mumbai, into one of those ingenuously twisted metallic installations that the city’s minor sculptors so love, a murmuring crowd converged on a multiplex less than fifty metres away. What seemed to be the problem? “They’ve cancelled the 10 P.M. show of ‘Delhi Belly,’ ” a man in shorts with an angry demeanor explained. Surely no one had the stomach to watch the scatological sleeper hit on an evening on which three blasts in southern Mumbai had left eighteen people dead and about a hundred and thirty wounded? “These kinds of things happen all the time,” the man replied. “Why should we put our lives on hold just because there have been a few bomb blasts?”

The crowd seemed especially peeved that the 8 P.M. show had been allowed to proceed. The attendant at the counter was apologetic. “We’d already sold the tickets so we couldn’t call it off,” he apologized. The movie that had been screened: “Murder 2.”

Thought of sharing the following with bloggers, though of not much relevance to real estate. What is surprising is why the real estate is priced so high in cities when the country is reeling under crushing poverty

Thought of sharing the following with bloggers, though of not much relevance to real estate. What is surprising is why the real estate is priced so high in cities when the country is reeling under crushing poverty

==> This is relevant to RE. More the misery in these villages/cities, lesser the opportunities, then MORE people will migrate to cities like Mumbai, Delhi, etc for better life. This will eventually drive up slums, consumers, and RE in metro cities.

I know many people coming to Mumbai from other states - well educated, working hard with great paying jobs and yes buying RE even with high prices --- WHY may you ask? then read the article again.

If infrastructure is developed in cities like Bihar, etc and there are business ready to venture in those location there will be less migrants to Metro cities. RE will naturally correct... but alas that will take aleast a decade. That is how Bangalore, and other cities really became big hit. Another example is people going west to USA, UK... as soon as India has opportunities less the people are interested in migrating to those countries.

GLD is good ETF, it is liquid, however taxable on the profit, and you have to pay an annual fee. You dont notice the annual fee but it is built into the price. Also ETFs are taxable. But if you buy bars, you can sell it on eBAY or in India, or anywhere else and the profit is not taxable.

Today it is at $1600/oz. Load it up if you have cash in the bank if it corrects. If you need to know where to buy reliable gold bars, let me know.

QE3 is here and pretty soon you will see QE4. These mf's have no options now but to continue printing until we are all diluted. Just like adding water to the milk..

@anon"There is no law to report gold bar/coin sale done by a common man to the government, not atleast in the USA. That is why buying coins/bars make sense."

By law, Capital gains from gold (whether through ETF or physical holding) should be reported and tax paid on them. As Pawan said, if you choose to not do it that's another thing altogether. It is illegal to start with. It is the same in the USA.

I am not a tax accountant or lawyer, but from what I have read and what i have been told from professionals, is that you dont have to report gold sales. For example, I can buy gold from Canada or Switzerland or even from the US mint at spot market price, plus a slight premium (based on the amount purchased) via a bank wire transfer and sell it on ebay and I dont have to report the sale. So there is no capital gains tax on physical gold. Let me know what you find.

Ajmer Property Services AnsalApi Offering Real Estate Services.Ajmer is a popular pilgrimage and educational center situated in the state of Rajasthan,India. The Real Estate Industry in Ajmer is on the drift in this city,AnsalApi is one of the big name in Real Estate Projects Ajmer.

1) Corruption - Compare UPA states vs NDA states. On an average from what i hear, Bombay is 3 times costlier than Bangalore for areas 3 times as far from core city, even accounting for Bombay being a metro always. If you think IT money is triggering prices why would this be the case?. Every level of govt official including small time clerks in UPA govt deal in crores and invest in benami RE around cities, as other assets can be traced. Chennai, Bombay, Delhi being good examples. Their money comes from loot of natural resources and bribes for doing business, that cascades to everything else.

2) Foreign speculators - Foreign institution investors speculating in Indian RE on the sly and the stock market. The developers are slush with funds at any time, its the small time RE developers who will be impacted in case of macro factors. Compare prices in 2005 to now, i.e after govt opened up RE for foreign investment.

3) NRI investment - NRI speculating on the sly through their families. My cousin's husband who is a US citizen gets 22% interest from a developer in Hyderabad and i dont think he pay taxes on it. Borrow at low interest rates in US and invest in India, this will also apply for 2 above.

4) Supply gap - Locals not selling in city areas, but speculate in the suburbs, cornering land etc. Almost every early middle class family of a city has multiple properties in that city.

6) Local Immigration - Huge immigration to few cities, politicians purposely controlling providing facilities in far flung suburbs forcing people to buy in small clusters of moderate-high priced areas with lifelong EMI's. This will go on for the next 30 years, Manmohan wants this for his western brand of economics to survive, i.e encourage move to cities.

7) Buyer base - Large base of genuine buyers with jobs on hand, with fear that they might miss out, at least now its still within reach. Why pay 15000 rent when you can own a house at 20000-25000 EMI with both working?

8) Demographics - Young population demographic, with huge aspirations for lifestyle. When banks are giving loans why not use it? It is also a hedge against inflation. Govt is anyway printing money like there is no tomorrow.

9) Upward mobility - My servant maids daughter just completed her BCOM and has got offers for jobs with top US call centers. Will she not compete the same pool as a middle class person now?.

10) Inflation - Cost of all materials shooting through the roof due to mafia controlled commodity market speculation.

Here is some good news if you want to believe it. There is a guy who lives opposite my house and has collected data for last 300 years worldwide for all markets, he says he expects RE to crash 40% by end of this year to mid next year. He predicted gold was going to rise 40-60% last year to me and it did (might not have been difficult). On the other hand he says his data says India has a great future, but would that not increase RE prices as well !! :-)

So, is Recession 2.0 really round the corner? In case it is, real estate builders and buyers will be equally affected. Here is a nice read on the steps to take just in case recession 2.0, 2011 does hit India.Follow the link:http://www.indianrealestatefordummies.com/2011/08/recession-20-2011-india-steps-to-take.html

Bangalore is the backbone parameter of India's global presence.Obviously its architecture has to be upgraded.I really amazed by affordable housing in Bangalore trend which is really wowsome.To have a peaceful adobe in bustling bangalore is an achievement in today's world.

16-oct-2011Just look back to the period of 2000-2005. 2 bhk flats were available at 15-20 lacs and home loan were at 6-7%.It was that period when people started to take 85% loan amount and that was a bit simple task for the common man like government servants and other middle class people. Then in 2-3 years till 2008 2 bhk prices shoot up to 80 lacs! Is it possible to take home loan of 85% price? Most people will not take such a huge loan position If at such high price, someone wants to give 20% cash, he needs to give 16 lacs cash and the remaining 64 lacs as home loan!!! IS IT POSSIBLE? For a 64 lacs loan for 20 years, the minimum EMI will be 60,000!!! It`s a ridiculus situation .99% middle class people will not be able to commit such position and to get that much loan amount is also not an easy task. To get loan of 64 lacs , The monthly income of a person should be atleast rs.1,71,000 (Because banks says that EMI portion should be atmost 35% of total net monthly salary while giving loan)!!!How many people in entire INDIA has so much monthly salary. EVEN Government Deputy Secretary, Chief of the army, Highest level Scientist have a salary of 1 lacs only and they will be able to purchase a maximum of DDA Janta Flat atmost.HA HA HA.

So it clearly indicates that it is a situation of Real estate bubble that can burst soon. All this is a tragic joke that is imposed on the common man. What about those people who gets a good handsome salary of 50,000-70000 p.m. They cannnot even think of buying a 2 BHK Flat.

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Difficult one ... Real Estate bust in emerging markets may impact in a big way. Economy is slowing down, high current account deficit, India Rupee at an all time low, FIIs pulling out money, high inflation all are not so good signs. There's no way RE prices can continue to sustain at this high rate.. Visit by blog on Pune Real Estate http://indianconcretejungle.blogspot.com

I just gone through the blog and after just read each and ever thread of the comments. It was really informative stuff. Thanks for sharing such deep knowledge and suggestions for Real Estate Market. I will look for your next blog for Real Estate of India